Best Buy: Grasping At Straws

Best Buy’s gradual disappearance took a predictable next step today, as the company reported disappointing earnings and announced a new series of desperation moves to find something to hold onto even as it sinks deeper into quicksand.

As part of yet another restructuring plan, the company intends to close fifty of its big box stores and fire an additional 400 corporate staff. (Best Buy currently operates 2,900 retail locations worldwide.)

The need for the closings is obvious. Today’s final report card for last year’s financial performance included several failing grades. Revenue at established stores fell 2.4% last year, following a 4.7% decline in the previous year. Overall, the company lost $1.23 billion last year, or $3.36 per share.

Readers of my earlier posts on cascading problems at the electronics superstore won’t be surprised to hear any of this. Nearly three months after a post-Christmas nightmare at my local Best Buy led me to conclude the company was in the early stages of going out of business, I still hear every day from customers, employees, and former executives with new horror stories.

(Just read through the comments from readers on the two posts, especially those from Best Buy executives cluelessly trying to explain that it’s the fault of uncooperative customers their “business model” isn’t working out.)

Deploying the New Killer Apps

Over the last three years, the industry experienced little innovation [in] many of the large traditional consumer electronics categories such as television, PCs and gaming. At the same time, consumers have enjoyed greater price transparency and ease of costs shopping. As a result, we knew we had to accelerate our cost reduction efforts, adjust our sales mix and significantly improve on the experience we were delivering for our customers. All of this in the most uncertain consumer and economic environment we've ever experienced.

But the real problem for Best Buy, as with other traditional retailers, is not that customers now know too much to take advantage of them. It’s not dwindling margins on TVs, computers, and mobile devices. It’s not that some online retailers don’t collect state sales tax, or have more forgiving return policies. It’s something much simpler.

Over the last fifteen years, each and every competitive advantage the big box stores had over other forms of retail has been systematically eroded or turned against them. Best Buy, like many retailers, is struggling not with any particular competitor or channel. They are competing with a perfect storm of disruptive technologies that have made buying, servicing, and using consumer electronics as different from a decade ago as they were during the time of Thomas Edison.

To name just a few, high-speed mobile broadband, cloud computing, tablet devices and the modular nature of app stores have utterly changed not only which products consumers buy, but how they shop for them, upgrade them, service them, and replace them.

Ironically, the culprits here are some of the very same technological innovations that Best Buy sells. In some sense, they’re arming their enemies, and giving them far better weapons than they keep for themselves.

These technologies are the foundation for a new generation of killer apps, a platform that extends vertically and horizontally in unpredictable directions but at accelerating speeds.

That’s what retailers and other incumbent industries are competing with. Some existing companies have embraced these innovations, and are using them to improve their competitive position. Others, well, not so much.

In Best Buy’s case, think of how those technologies are exploited by virtual retailers, notably Amazon. E-commerce, perhaps the leading cause of decline for Best Buy, started out simply as a cheaper alternative, offering customers a faster, more convenient, and less-expensive way to buy.

For smaller items or goods that required little in the way of service (cables, batteries, books, DVDs, accessories), virtual retailers have been the superior option since they first appeared in the late 1990's. Customers don’t need much pre or post-sales support for such commodity goods, and can generally wait a day or two for home delivery. Virtual retailers, in turn, don’t need to own and operate expensive real estate or staff their stores even when there are few customers around, or maintain vast inventories for display purposes.

Over time, virtual retailers used these advantages as a wedge to force themselves up the food chain and into the more complicated and profitable categories of consumer electronics. The remaining advantages of brick-and-mortar have been overcome, gradually and then suddenly, through technical and business innovations that include embedded video on their sites, highly credible customer reviews and peer advice, free or subsidized overnight shipping, easy returns and extended warranties, and phone or on-page video chat for customer support.

What’s left for the retailer? Maybe not much. At best, there are still a few items—for example, high end stereo equipment and televisions—where the retailer may still hold the upper hand. These purchases often require seeing and hearing in-person (what economists call “experience” goods) and their technical complexity (the stuff inside) leaves most consumers needing a trusted expert to help navigate choices, options, features and functions.

But Best Buy has squandered these dwindling niches, content to pick up some of the abandoned customers of already-bankrupt competitors including Circuit City and call that an increase in market share.

Their retail locations, meanwhile, far from being the “fun and informative shopping environment “ the company’s annual report believes them to be, have become torture chambers, where customers are assaulted by employees and co-marketing third-party salespeople motivated not to provide expertise but to upsell overpriced products and services, including expensive service contracts and high-interest rate credit.

While not compensated directly based on sales, several employees have written to tell me that sales staff who don’t meet quota are quickly marginalized or fired. (The company announced today it would “change its employee compensation model to revolve around customer service and business goals”). In-store staff are trained more on “salesmanship” than on the store’s products. Best Buy CEO Dunn acknowledged that reality today, promising a “40% increase” in sales training, whatever that means.

And because of what (in response to my earlier article) Dunn conceded to be poor integration between retail and on-line channels at Best Buy, customers have no compelling reason to stick with Best Buy once they are done with their research. They can and often do experience the products at the physical store (if the sales staff leave them alone long enough) and then buy it from an online retailer, often with a better price or better after-sales support or both.

Management: Tips for Survival go Unheeded

As I emphasized in January, Best Buy doesn’t have to die, although the company seems determined to do so at accelerating speed. Retail locations are far from irrelevant and, in the right hands, can be turned into high-profit, brand-enhancing icons.

If you want to see how consumer electronics can still be sold in retail locations, just spend ten minutes in an Apple store. They are selling some of the same products as Best Buy, but the two experiences couldn’t be more different. (Note to Best Buy senior executives and board members: I mean it. Just spend ten minutes in an Apple store. I’m guessing few of you ever have.)

Apple, notably, has learned the lessons of experience goods retailers in a variety of categories--think Starbucks, Nordstrom, Abercrombie & Fitch, Trader Joe, Williams & Sonoma, Rainforest Cafe and American Girl. In typical fashion, the company has gone them several better.

Last week, I went to the local Apple store with a friend, who was looking for a few accessories for his new iPad (he purchased the iPad itself from Apple’s website). The lighting is warm, the atmosphere is inviting, the staff are energetic and informed. There are classes going on right in the store, and products are everywhere, at eye level, waiting to be tried. You can’t help but feel cool just being there, even if, like me, you don’t own a single Apple product.

In such an inviting atmosphere, customers do the “upselling” on themselves. The sales staff linger discreetly in the background, ready to take payment on-the-spot and email you your receipt. (No paper, no bags, no checkout lines, no security checks. It’s all electronic, eco-friendly and respectful.) We were in and out in fifteen minutes, but we could have easily spent the day absorbing the company’s cult-like brand.

Apple didn’t invent the idea of smart retailing. Indeed, in any age, the only way retailers have ever improved their competitive advantage has been to engage in relentless innovation, making full use of the disruptive technologies available at the time. In an earlier era, that might have included plate glass windows and electric lights, or business innovations such as pre-set prices, coupons, and multi-channel advertising.

In consumer electronics today, it’s digital content lockers in the cloud, partnerships between TV manufacturers and digital programming providers, and short, short, short product cycles driven by Moore’s Law and its kin. Among many others.

Best Buy, however, seems to have run out of ideas. Today, the company at least appeared to admit it was fighting a losing battle on multiple fronts, announcing several initiatives it apparently thinks will reverse the negative financial trends. In addition to closing stores and changing its employee compensation model, for example, CEO Dunn announced plans to cut an additional $800 million in operating costs by 2015, open 100 new locations in a smaller or specialized (mobile devices) format, and boost online revenue (somehow) by 15%.

News flash: that’s not a plan, let alone a strategy. It’s throwing spaghetti against the wall to see if any of it sticks. Meanwhile, to abuse the metaphor, your true competitors are rebuilding their walls every day, and building them out of cheaper, stronger, and more attractive materials. They’re also lighting their walls better and hiring motivated, informed staff to help customers get over one wall and on to the next, rather than pushing them in face-first, hoping to numb them into submission.

Are Amazon and Apple perfect? No. In retail, though, it’s all relative, and for most customers and most transactions, only Best Buy could possibly think it was competing in the same sport or even in the same stadium. It’s as if they have no idea who they are actually competing with now. (And no, Best Buy employees posing as outraged readers of Forbes.com, I don’t own stock or consult for either Amazon or Apple. I don’t even buy from the latter.)

For Best Buy, there are still plenty of good ideas out there, waiting to be tried, tested and, when proven, implemented with lightning speed and laser focus. I listed several in my follow-up posts, and even offered to meet with the company’s senior management at this year’s Consumer Electronics Show. (No response.) But I hardly have the monopoly on free advice for Best Buy. At Time’s Techland, Harry McCracken has more. So does Gigaom’s Stacey Higginbotham. And that’s just today.

So what’s the real problem? It’s not one of unbeatable competition. Nor is it a lethal combination of technologies that could be just as easily co-opted for Best Buy’s advantage. And it’s not a lack of things to try.

The problem, instead, is a corporate culture that appears to have given up trying.

And that, unfortunately, is a sure sign of a company ready to shift from slow decline to dramatic collapse. I hope I'm wrong. We'll see soon enough.

Want to learn more about the new generation of killer apps? Follow me on Twitter @LarryDownes